8am reads

by Gilbert Keith

A RECENT Free Exchange column (“Middle-income claptrap“) expressed some scepticism about the notion of a middle-income trap. That notion has attracted a lot of attention recently thanks in part to a pair of papers (here and here) by Barry Eichengreen, Donghyun Park and Kwanho Shin. In the column we reported briefly on our attempt to replicate their work and play around with it. In case anyone is interested, I’d like to share a bit more of that number-crunching in this post.

Messrs Eichengreen, Park and Shin are interested in fast-growing economies that suffered sharp slowdowns. They define fast growth as 3.5% or quicker. (They look at countries that have enjoyed per-capita GDP growth of at least 3.5% a year on average, sustained for seven years.) They set the threshold for a sharp slowdown at 2 percentage points. (Average growth had to be at least 2 percentage points slower in the subsequent seven years than in the previous seven.)

[…]

These slowdowns are all interesting examples of economic lulls and lapses. They are all cases worth identifying and investigating. But such slowdowns are no more likely to strike at middle-income levels. And even when they do, they are often not enough to trap an economy for long.

Why is this interesting? The analysis seems unusually transparent – you can try to replicate the “experiment” and see if you get the same results. Not very often that we see a popular publication attempting this; I know Paul Krugman regularly tells you where his data is coming from, and how he is particularly interpreting it. I haven’t seen it done to cutting-edge research, however. Perhaps this is a whole new blogging prospect!

2. There’s a whole career for “growth-hacking.” I know the following is a blog post, but it suffices:

growth hacker (noun) – one who’s passion and focus is pushing a metric through use of a testable and scalable methodology.

“Growth hacker” is a new word for most but a long held practice among the best internet marketers and product managers in Silicon Valley. With mass media fading away and the onslaught of mass customization & niching on the web, marketing as we known it for the past 100 years has died. People are awash with mounds of data and marketing fatigue is at an all-time high. Users are drowning and won’t pay attention to the next best widget, regardless of how good it is. Distribution is now the number one problem that faces every product and every startup.

[. . .]

A growth hacker finds a strategy within the parameters of a scalable and repeatable method for growth, driven by product and inspired by data. Growth hacking’s goal are based in marketing but driven by product instincts. A growth hacker lives at the intersection of data, product, and marketing. A growth hacker lives within the product team and has a technical vocabulary to implement what he or she wants.

The famous Russell Long quote above reflects a basic truth about politics: Many people want other people’s taxes to go up, but not their own. The same is true for spending: Other programs are wasteful, but not our favorites. City dwellers find agricultural supports wasteful, Farmland dwellers think the same of subsidized mass transit. Programs in other people’s districts are expensive and unnecessary, but those in ours are crucial and required.

This is no way to run a country.

If we were smart, we would apply our understanding of human nature to resolve spending and tax issues. Game theory* is a study of strategic decision making — how “conflict and cooperation between intelligent rational decision-makers” leads to certain outcomes.

Basic game theory could help us with these issues, if we think about it intelligently. How? By stopping the taxing and spending cuts of that fellow behind the tree — and instead force people to raise their own taxes and cut their own spending.

If I were advising the President of the United States, I would make the following suggestion: He should announce a 20% spending cut over the next 10 years. Create a panel — Treasury Secy, Veep, House Speaker, Senate Leader, FOMC rep — to oversee the effort, but with one crucial twist. Instead of the usual cutting, the twist is to use each State’s Congressional delegation must decide what gets cut. Both of a states Senators and all of the Congressmen form a working group to decide how federal revenues, benefits, expenses and costs that flow TO THEIR OWN STATE will be cut.

I’m more sympathetic to the readers’ opinions (expressed in the comments section) that this is good theory, but the state of politics is too rotten to get anything good out of this. That or you end up with vulnernable people in various states becoming more marginalized with the spending cuts.